Real Estate Market Review
2nd Quarter
2017
NORTHERN CALIFORNIA | San Francisco County
San Francisco
Office
Market Forecast
Trends
Absorption
Vacancy
Class A FiDi Rental Rate
Under Construction
Notable Leases
First Republic Bank
1 Front | 190,000 s.f. (Direct)
Otto
Pier 70 | 126,594 s.f. (Direct)
Affirm
650 California | 86,000 s.f. (Direct)
WeWork
655 Montgomery | 51,859 s.f. (Direct)
With several new office towers rising and up to a dozen 100,000 s.f.
tenants searching for space, the San Francisco office real estate
market remains exceptionally strong. Occupancy levels were
unchanged during the second quarter, which saw 16,679 square
feet of positive net absorption, but the market added two more
leases in excess of 100,000 s.f., bringing the 2017 total to eight.
Asking rent trends varied by the type of space being marketed,
with creative offerings seeing up to a 5% year-over-year rise in
rents while traditional offices trended slightly downward, prompting
Class A landlords to offer substantial tenant improvements to
attract a wider range of users. Overall, Class A Financial District
spaces averaged $70.63, Class B offerings were at $65.90,
and Class C creative product was marketed for $67.38. Both
national and foreign investors found desirable acquisitions in San
Francisco, which remains a gateway market for Asian developers
eyeing assets across the Pacific. More than 6.5 million square feet
of office space was under construction at quarter’s end, but ample
demand among technology giants from Amazon to Facebook
suggests that rental rates for creative offices in the city are unlikely
to fade despite the impending increase in supply.
Notable Sales
Beacon Capital Partners
44 Montgomery | 631,225 s.f.
Purchased for $475.4M or $753/s.f.
Brookfield Office Properties
1 Post | 424,000 s.f.
Purchased for $245M or $578/s.f.
GAW Capital Advisers
555 Montgomery | 228,573 s.f.
Purchased for $120.6M or $528/s.f.
Sino-Ocean Land
1161 Mission | 65,600 s.f.
Purchased for $42M or $640/s.f.
Technology Sector
Established technology firms continue to grow in San Francisco and Silicon Valley, competing for
the area’s top talent and its most coveted real estate while striving to become market leaders in the
industry’s new frontiers. Tech companies’ desire to form urban campuses in the city paved the way
for several 100,000 s.f. or greater leases during the first quarter. The industry’s expansion into fields
like autonomous cars was a significant driver this quarter, and the advancement of new subsectors
such as virtual reality could be a key factor in the quarters to come.
The period’s largest tech sector lease was signed by Otto, the self-driving truck company owned by
Uber, which took 130,000 s.f. at Pier 70, an attractive location because it can accommodate both the
company’s office and manufacturing space needs. That deal came shortly after GM Cruise, the selfdriving car company known as Cruise Automation before its acquisition by General Motors, leased
nearly 140,000 s.f. at 1201 Bryant. GM Cruise intends to use the building as offices for its engineers
and a “development laboratory” for its autonomous vehicles, in the wake of a partnership with Lyft
to develop a fleet of self-driving, ride-sharing cars. Both of these leases are in buildings classified
as flex or PDR space, where the zoning code prohibits traditional office uses, but the evolution of
the technology sector into fields that blur the line between office and manufacturing is a noteworthy
trend in the tech-driven San Francisco market.
Continued, page 2
2nd Quarter 2017 | 1
Area Review
Including Otto and GM Cruise’s flex-space leases, there have been eight
deals for more than 100,000 s.f. each signed in the city in the year to date.
The San Francisco record for 100,000 s.f. deals in a single year is 17, set
in 2014, and the activity in the last two quarters puts the city just shy of
that pace. Multiple other technology giants, led by Amazon and Facebook,
were rumored to be in the market for large blocks of office space at
quarter’s end, eyeing both existing availabilities and buildings under
construction. Given these firms’ appetite to increase their San Francisco
footprint, the uptick in six-figure leases is likely to continue into the second
half of 2017.
Spotlight: 650 California
Investors holding 650 California, a 478,392 square foot Class A
tower in the northwestern corner of the Financial District, have gone
through the ups and downs of the San Francisco market over the
past two decades. The building has traded four times since 2000,
for $322/s.f. in October of that year, then $627/s.f. in June 2007
ahead of the late-2000s recession, then $457/s.f. in June 2012
before the ongoing tech boom, and most recently, for $646/s.f. in
August of 2014, a year before office rents in the city soared. UBS
Group saw the asset’s value drop by 27% from 2007-2012, while
Tishman Speyer, which spent $14 million on renovations including a
revamped lobby and onsite parking garage, earned a 41% return on
its purchase price in just 26 months. Columbia Property Trust was
the buyer in that $309 million transaction, and despite purchasing
650 California at a 3.7% cap rate, it viewed the deal as a significant
value-add opportunity.
WeWork
The $18 billion co-working startup WeWork continued its San Francisco
expansion by signing a 52,613 s.f. lease at 655 Montgomery, taking over
space formerly occupied by Hotwire. The lease puts WeWork in direct
competition with Spaces, a subsidiary of International Workplace Group,
which is opening a 35,300 s.f. Jackson Square location at 1160 Battery.
WeWork now holds approximately 536,000 s.f. of San Francisco office
space in long-term leases. While initially geared toward startups and
smaller firms with rapidly changing space needs, it has recently attracted
interest from established companies, forming a partnership with Amazon
to operate several of its offices from Boston to San Jose. WeWork will
officially open two locations, at 201 Spear and 650 California, during the
third quarter.
The building’s leading tenants at the time were Credit Suisse, Littler
Mendelson, and Goodby Silverstein & Partners, traditional office
users with the buildouts to match. All three have since moved out,
clearing the way for more than 200,000 s.f. of new leases. The
updated tenant roster is led by WeWork, which took 60,576 s.f. in
February, and the lending startup Affirm, which grabbed 86,000
s.f. in one of the second quarter’s largest deals. The starting rents
on the recent long-term leases are in the low-$70s, but bringing
those creative users well north of Market Street and BART required
considerable concessions by the landlord. Columbia has loaded its
new leases with more than $100/sf in turnkey tenant improvements,
tearing down office-intensive buildouts and recreating full floors
from shell. As the San Francisco market increasingly favors creative
spaces and users, for landlords looking to create value and preserve
above-average rents, those triple-digit TI costs could become the norm.
Office Leasing
Direct asking rental rates in downtown San Francisco are up approximately
2% year over year, but are increasingly bifurcated between creative spaces
and traditional office build-outs:
•
Fully-serviced Class A spaces ranged from the mid-$60s at the
northern edges of the Financial District to the low-$100s on the upper
floors of choice properties such as 4 Embarcadero Center. A creative
spec suite on the top floor of 49 Stevenson was asking $73 FS.
•
Availabilities in new office developments such as Park Tower and 181
Fremont were marketed in the high-$80s or low-$90s, NNN; the NNN
expenses are estimated at $25, bringing the fully serviced equivalents
above $100/sf.
•
Full-floor Class B offerings varied widely. A large, top-floor opportunity
at 875 Howard was being marketed for $75 IG, while a more
traditional, office-intensive space at 100 Bush was priced at $58 FS.
•
Class C SOMA product averages stayed in the mid-$60s, spanning
from the low-$40s for non-creative listings to the mid-$70s for spaces
geared toward tech tenants. A ground-floor spec suite at 984 Folsom
was listed for $65 IG.
Absorption
The second quarter saw 16,679 square feet of positive net absorption, as
most of the move-outs during the period were relocations within the city:
•
The Mid-Market area added 271,244 s.f. of occupied office space,
as Thumbtack (166,044 s.f.) and NerdWallet (104,850 s.f.) took
over spaces subleased from Twitter at 1355 Market and 1 Tenth,
respectively.
•
Several North Financial District move-outs produced 192,274 square
feet of negative absorption. AECOM left 38,701 s.f. at 1 Montgomery,
Goodby Silverstein & Partners gave back 31,092 s.f. at 650 California,
and Lithium Technologies placed 25,024 s.f. on the market for
sublease at 225 Bush.
•
Lower SOMA saw 81,975 s.f. of negative net absorption, as Invitae
Corporation dropped 38,963 s.f. at 475 Brannan while consolidating
its San Francisco workforce at 1400 16th Street.
While traditional office spaces may face longer vacancy periods, the
high volume of technology tenants in the market ensures that creative
availabilities are quickly reabsorbed. New construction deliveries coupled
with expansions by some of the city’s tech giants should produce more
absorption gains in the coming quarters.
Investment
Office investment activity in San Francisco yielded more than $1 billion
in dollar volume for the fifth consecutive quarter, as 1.7 million square
feet of real estate transacted at an average price tag of $615/s.f. Bostonbased Beacon Capital Partners acquired 44 Montgomery, a 688,902 s.f.
Class A tower, for $475.4 million or $753/s.f., underwritten at a 3.9% cap
rate. That price is near the top of the market for a north Financial District
asset primarily occupied by traditional tenants such as law firms and the
US Securities & Exchange Commission. On the other end of the office
spectrum, Beijing-based Sino-Ocean Land bought 1161 Mission, a 65,600
s.f. Class B building in the Mid-Market area for $42 million or $640/s.f., the
Beijing-based developer’s first investment in the United States. The seller,
Los Angeles-based Downtown Properties Holdings, a U.S. arm of Hong
Kong-based Gaw Capital Partners, obtained the building for $19.3 million
in August of 2012, renovated the interior into creative space, and secured
WeWork as an anchor tenant. WeWork’s presence may have made 1161
Mission an appealing gateway investment for Sino-Ocean Land because
the companies have an existing partnership in China.
Data Source: CoStar
2 | San Francisco Office Real Estate Market Review
VACANCY VS FINANCIAL DISTRICT ASKING LEASE RATE
18%
VACANCY VS AVAILABILITY
$85
14%
$65
10%
$45
15%
FORECAST
12%
9%
6%
$25
6%
3%
$5
16
20
YT 17
D
15
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
Vacancy
20
99
20
98
19
19
19
97
2%
0%
2Q15
3Q15
4Q15
Vacancy
Asking Lease Rate (PSF)
AVERAGE SALE PRICE & CAPITALIZATION RATES
1Q16
Availability
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
Sublease Availability
ASKING LEASE RATE
$900
10%
$800
9%
$700
8%
$600
7%
$500
6%
$400
5%
$300
4%
$200
3%
$100
2%
$80.00
FORECAST
$75.00
$70.00
$65.00
Average Sales Price (PSF)
$55.00
$50.00
2Q15
20
16
20
YT 17
D
5
20
1
4
20
1
3
20
1
2
20
1
1
20
1
0
20
1
9
20
0
8
20
0
7
20
0
6
20
0
5
20
0
4
20
0
3
20
0
2
20
0
1
20
0
0
20
0
9
19
9
8
19
9
19
9
7
$60.00
3Q15
4Q15
Class A FiDi (PSF)
Cap Rate
NET ABSORPTION - HISTORICAL
1Q16
2Q16
3Q16
4Q16
Class B FiDi (PSF)
1Q17
2Q17
3Q17
4Q17
1Q18
Class C SOMA (PSF)
NET ABSORPTION - QUARTERLY
4M
1M
3M
800K
2M
600K
1M
400K
0
200K
-1M
-2M
0
-3M
-200K
-4M
-400K
-5M
-600K
-6M
Net Absorption (SF)
kiddermathews.com
20
YT 17
D
20
16
20
15
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
-1M
19
99
-8M
19
98
-800K
19
97
-7M
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
Net Absorption (SF)
2nd Quarter 2017 | 3
kiddermathews.com
Market Breakdown
2Q17
Offices
Annual %
Change
2Q16
7.0%
7.0%
6.1%
14.8%
Availability Rate
11.9%
12.2%
11.7%
1.8%
Bellevue
425.454.7040
Asking Lease Rate (Class A FiDi)
$70.63
$71.10
$68.71
2.8%
1,727,480
2,540,291
2,381,815
-27.4%
South Seattle
206.248.7300
Sold SF
932,454
2,222,182
995,774
-6.4%
16,679
-858,265
228,262
N/A
Seattle
206.296.9600
Vacancy Rate
1Q17
Leased SF
Net Absorption
Tacoma
253.722.1400
1.5M
15%
1.0M
10%
500K
5%
0
0%
Roseville
916.751.3600
16
20
YT 17
D
15
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
$700
15M
$550
10M
$400
5M
$250
0
$100
AVERAGE SALE
PRICE/SF & FINANCIAL
DISTRICT ASKING
LEASE RATES
16
20
15
20
14
20
13
20
12
20
11
20
10
09
20
20
08
20
07
06
20
20
05
20
04
03
20
02
20
20
01
00
20
Total Square Feet of Sales
20
YT 17
D
Carlsbad
760.430.1000
99
19
97
San Diego
858.509.1200
Median Price/Building SF
SF
$/SF
20
YT 17
D
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
19
20
Average Sale Price/SF
16
$10
15
$100
Designated Broker
Reed Payne | LIC #00818935
14
$20
13
$200
12
$30
11
$300
10
$40
09
$400
08
FiDi Asking Lease Rate
07
$50
06
$500
05
Average Sale Price
04
$60
03
$70
$600
02
$700
01
$80
00
$800
99
$90
97
$900
Contact
Reed Payne
Executive VP, Brokerage
Northern California
415.229.8888
[email protected]
00
20M
20
Median Price/Building SF
Inland Empire
909.764.6500
Phoenix
602.513.5200
20
$/SF
$850
Total SF of Sales
Orange County
949.557.5000
Reno
775.301.1300
99
SF
25M
20
Commerce
323.727.1144
HISTORICAL SALES SF
& MEDIAN SALE PRICE
Vacancy
19
Long Beach
562.472.0071
New Deliveries
19
Los Angeles
213.880.5250
20
19
97
Sacramento
916.970.9700
19
Silicon Valley
408.970.9400
19
Vacancy
98
New Deliveries
98
Redwood Shores
650.769.3600
%
20%
19
San Francisco
415.229.8888
SF
2.0M
98
Portland
503.221.9900
HISTORICAL NEW
CONSTRUCTION &
VACANCY RATES
19
Olympia
360.705.2800
FiDi Asking Lease Rate
This information supplied herein is from sources we deem reliable. It is provided without any representation, warranty or guarantee, expressed or implied as to its accuracy. Prospective Buyer or Tenant should conduct an
independent investigation and verification of all matters deemed to be material, including, but not limited to, statements of income and expenses. CONSULT YOUR ATTORNEY, ACCOUNTANT, OR OTHER PROFESSIONAL ADVISOR.
4 | San Francisco Office Real Estate Market Review